In many computerized trading systems, the participants (individual traders or institutions) are qualified in advance by an exchange and each offer is broadcast from one participant to all other qualified participants.
When the subject of the trade is a commodity (such as wheat or copper) or a financial instrument (such as Treasury Bills or foreign currency), multiple offers for the same commodity or instrument are conventionally ranked by price per unit. Depending on the trading conventions in effect, offers at the same price may be further ranked by size and/or time in a queue of available offers; however, for any given commodity or financial instrument, only one offer is at the head of an associate queue.
Under many market conditions, “market makers” (institutions and/or individual traders whose open offers are available to other traders) will set a price at or slightly above the best price currently available, with the expectation that their offer will reach the head of the relevant queue in due course. However, if there is a sudden change in market conditions, the market maker may wish to cancel or modify his outstanding offer before it reaches the head of the queue. To that end, it is known to warn the trader responsible for an open quote when his quoted price is equal to the best price currently available and/or when his offer reaches the head of queue. Similarly, if the maker's quote was ready to be accepted (i.e., it is the highest ranked quote in the system) but is subsequently bettered by another maker, the original maker may be given an opportunity to revise his offer or remove it from the market.
In the traditional voice broker foreign exchange market, the broker announces “Your bid” to a market maker when the maker's own quote is at the head of the queue; the broker also (optionally) announces and/or cancels that quote when someone else submits a better price.
In an anonymous electronic brokerage system such as the EBS system or Reuters 2000-2 in which individual trades of foreign currency are settled directly between two banks (or “trading floors”) rather than through an exchange or a clearing house, the identity of the parties is kept confidential until an offer from one party has been matched to a bid from another party and the matching criteria include not only price, but also the existence of bilateral credit between the two parties. Thus, unlike a traditional voice broker who processes only one quote at a time (typically the first offer in the queue) and who provides both parties with an opportunity to accept or reject a potential trade after the parties have already been identified, a computerized matching process is able to perform many tasks concurrently and to use objective matching criteria (such as preestablished counterparty credit limits) without divulging any confidential credit information. Moreover, at least the known EBS system operates in a credit screened market in which a price is not offered to a potential counterparty unless it is “Dealable”—i.e., each party to the potential transaction has previously indicated a willingness to deal with the other party. Thus, there is no longer a single queue for a given currency, but a separate logical queue (typically containing only a subset of the open quotes for each trading floor). Accordingly, the known EBS system displayed an active quote on the maker's terminal in a red background (a so-called “Red Quote”) if that quote was either the best Dealable (or the best regular size Dealable) quote on at least one trading floor, i.e., the quote was at the head of some floor's queue of “Dealable” quotes, thereby providing the maker with a signal that his quote has the potential of being about to be accepted. In addition to the visible warning (the quote is displayed on a red background), the EBS voice says “Your bid/offer” and the background of the key fields on the transaction panel turns from yellow to red. Preliminary versions of the EBS system also provided an indication if a quote was “joined” with a Red Quote, i.e., was in the Dealable queues of at least one trading floor and was equal to the best price that was Dealable to that floor, but was not at the head of the Dealable queue on any trading floor, and thus did not qualify as a Red Quote.
However, as a result of the lack of credit between many possible pairs of trading partners and the fact that market makers are reluctant to make an offer that is substantially worse than the best price that is currently available, almost every quote is at the head of the queue on at least one trading floor, and thus the indication that a quote was Dealable on at least one trading floor had limited practical value.
A quote that lost its red status (as indicated by the transaction panel fields turning from red to yellow) is said to be “bettered.” If the “Cancel When Better option” in the trader profile is set, such a bettered Red Quote was automatically canceled by the EBS system.
More recent versions of the EBS system have also included a capability for aggregating a regular size (typically US $10 Million) Dealable quote from several quotes for smaller quantities to display a synthetic “regular” size Dealable price whose individual components had priority in time and/or price over any other available quotes. In that case, the “regular Dealable price” would be equal to the worst priced component of the aggregated deal.